The proximate release of the Australian and New Zealand Budgets has prompted some comparisons between the two (see this odd news story).
To an extent, these comparisons are fair — both nations are small open economies that have been subject to basically the same shocks over the last few years. The exchange rates between the two is typically stable, reflecting the fact that the circumstances of the two do not vary over-much.
There are, however, a few differences worth noting: Australia had a mining boom, and NZ had a lot of bad luck. NZ first had an intense mini-financial crisis, when their small non-bank finance sector lost access to securitization based funding; next Christchurch (a major city) fell down following a series of severe earthquakes.
Perhaps that stored up some good luck for their successful rugby world cup campaign (they were certainly due) …
So onto the comparison: both nations have struggled with a very strong currency — you can see in the above chart that the NZD Trade Weighted Index recently made a new cycle high (though lower inflation has made the appreciation less painful — see this post for more).
As a result of the painfully high currency, RBNZ Gov Wheeler recently confirmed that the RBNZ had intervened in NZD FX market. Also, the RBNZ is looking at macro-prudential policies to slow the inflow of capital into the housing market: the RBNZ believes these would both reduce NZD appreciation pressures (see the above chart), and allow them to cut their target interest rate.
As both economies are small and open, their terms of trade are a key input to both economic and fiscal outcomes. Reflecting this, both Australian and NZ budgets include forecasts for their terms of trade (see here for more on the AUD terms of trade) — the chart below shows the history and budget forecasts (both indices are rebased so the full year average for 1989 = 100)
The thing that ought to jump out is that the Australian Treasury expects an ongoing decline in the terms of trade (not fast enough in my view), and that the NZ treasury expects the recent firm recovery of their terms of trade to both continue, and to take them to an all time high.
Naturally, I object to the NZ Treasury’s assumption: it’s imprudent to forecast this stuff — i would prefer a ‘back to average’ assumption in all cases.
The ratio of these two terms of trade give a sense of what has occurred over the past decade or so. Starting is about 2004, the ratio of Australia’s terms of trade to NZ’s terms of trade began to surge (this was also the year the Australian fiscal rot started).
With that surging terms of trade came a surge in government revenue — this was particularly the case following the 2008 financial crisis, where-after the ratio surged to an all time high as ‘stimulus’ favoured hard commodities over soft commodities.
Partly because of this Australia continued to grow — but there was also a combination of good luck and good management. NZ, by contrast, had a heavy recession.
The great shame of all of this is that the Australian boom was (mostly) wasted — we allowed spending to rise along with our income. Even following the tight budget of 2012-13, Australian Government spending markedly outpaces NZ Government spending.
To those that say we must not tighten policy, as it would damage growth, i direct them to the example of NZ — there was a necessary fiscal adjustment, through which they lowered their trend pace of government spending. I was hopeful that’s what we would get something similar in the 2013-14 budget, following the reasonably sound 2012-13 budget — however spending just bounces back to the prior trend.